Debt Consolidation
Quick Definition
Combining multiple debts into a single loan, typically at a lower interest rate.
Full Explanation
Debt consolidation involves taking out a new loan to pay off multiple existing debts, leaving you with a single monthly payment, ideally at a lower overall interest rate. Common consolidation tools in Canada include personal loans, home equity loans, HELOCs, balance transfer credit cards, and debt management programs through non-profit credit counselling agencies. For example, replacing four credit card balances at 19.99% with a personal loan at 9.99% significantly reduces interest costs. However, consolidating unsecured debt into a secured loan (like a HELOC) puts your home at risk.
Related Terms
HELOC (Home Equity Line of Credit)
A revolving credit line secured by your home equity, up to 80% LTV.
Personal Loan
An unsecured or secured loan for personal use, repaid in fixed monthly installments.
Credit Card
A revolving credit facility allowing purchases up to a limit, with a standard 19.99% interest rate.
Debt-to-Income Ratio (DTI)
The percentage of your gross income that goes toward debt payments.
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